the good, the bad and the ugly deborrah glenn-long masfaa 2002

The Good, the Bad and the Ugly

Deborrah Glenn-LongMASFAA 2002

©2002 by Connecticut Student Loan Foundation. All rights reserved.

Reasons for Consolidating

• Lower monthly payments• Convenience of single payment• Convert variable rate loan to fixed

interest rate• Cure a defaulted loan

– Re-establish eligibility for Title IV aid– Deferment eligibility restored


Loans Eligible for Consolidation

• Federal Stafford Loans• Federal PLUS Loans• Federal Direct Loans (Stafford and

PLUS)• Federal Perkins or National Direct

Student Loans• Federal SLS/ALAS• Federal Insured Student Loans (FISL)


Loans Eligible for Consolidation

• Health Education Assistance Loans (HEAL)

• Nursing Student Loans (NSL)• Health Professions Student Loans (HPSL)• Loans for Disadvantaged Students (LDS)• Federal Consolidation Loans…sometimes


Reconsolidating

• Generally, Federal Consolidation Loans cannot be reconsolidated

• Two exceptions:– Borrower has obtained a new eligible

loan– Borrower is consolidating existing

consolidation loan with at least one other eligible loan, regardless of when that loan was made


Adding More Loans

• Borrower must request the addition of eligible loans within 180 days

• Addition of loans may change interest rate and/or repayment term

• May reconsolidate if more than 180 days have passed


When?

• Borrower must be in grace period or repayment status for each loan being consolidated

• If in grace period, borrower has choice of delaying consolidation until end of grace period

• No other Consolidation Loan applications pending


Selecting a Lender

• Single holder rule• Exceptions to single holder rule

– Unable to obtain Federal Consolidation Loan

– Lender refused to provide income-sensitive repayment schedule

• Borrowers with at least two different loan holders may consolidate with any lender


Maximum Interest Rate

• Weighted average of the interest rates on loans being consolidated

• Rounded up to nearest 1/8th percent

• Fixed for the life of the loan• Will not exceed 8.25%


Weighted Average Interest Rate

• Step 1: Multiply outstanding balance of underlying loans by each loan’s current interest rate

• Step 2: Add the totals from step 1 and divide by the total dollar amount of loans being consolidated

• Step 3: Round up to nearest 1/8th percent, but not to exceed 8.25%


Example

• Student is consolidating $12,000 in Subsidized Stafford Loans

• Borrower is in repayment with current interest rate of 4.06% on Stafford Loans

• Student is also consolidating $7,000 in Perkins Loans with interest rate of 5%


Step 1 • $12,000 x 4.06% = $487.20

• $7,000 x 5.00% = $350.00


Step 2 • $487.20 + $350.00 =

$837.20

• $837.20 ÷ $19,000 = .0441 (4.41%)


Step 3 • 4.41% is rounded up to

nearest 1/8th percent• Weighted average interest

rate = 4.50%• Final interest rate cannot

exceed 8.25%


Grace Period

• Weighted average interest rate for Unsubsidized Stafford Loans is calculated using interest rate that is .60 percentage points lower than interest rate when in repayment

• 2002-03: 3.46% vs. 4.06%• Borrower will lose remaining grace

period


Repayment

• Consolidation Loan enters repayment when the loan is disbursed

• First payment is due within 60 days

• Student chooses repayment option on the Consolidation Loan application


Repayment Plans

• Standard

• Graduated

• Income-sensitive

• Extended


Maximum Repayment Period

Amount of Loans Maximum TermLess than $7,500 10 years$7,500 - $9,999 12 years$10,000 - $19,999 15 years$20,000 - $39,999 20 years$40,000 - $59,999 25 years$60,000 or more 30 years


Deferment & Forbearance

• Date of consolidation• Whether borrower included all FFEL

Loans in the Consolidation Loan• Deferment eligibility of underlying loans• Extent to which borrower has already

obtained deferments• Usual forbearance options still available


Interest Subsidies

• Borrowers retain interest subsidies on Subsidized Federal Stafford Loans

• Loss of all interest subsidies on Federal Perkins Loans

• Borrowers should remember that they do not have to consolidate all loans


Special Provisions

• Cancellation and forgiveness provisions may be forfeited

• Borrowers with HEAL Loans may lose internship/residency and primary care deferments


Married Couples

• Joint and several liability for all loans– regardless of changes in marital status– even if spouse dies– even if spouse becomes disabled– despite discharge through bankruptcy

• Both borrowers must meet requirements for deferment, forbearance or discharge (except school closure or false certification)


Borrower Benefit Programs

• Most borrower benefit programs are forfeited when loans are consolidated

• Loss of benefits must be weighed against the advantages of converting to a fixed interest rate loan

• Borrower’s point in the repayment process can be a critical factor


Questions

the good, the bad and the ugly deborrah glenn-long masfaa 2002

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